Deciphering Through False Narratives: The Next 6 Months in Markets

Over the last couple of months we’ve seen a significant change in narrative in both US and crypto markets. Many expected a final rally that would take BTC to over $100,000 by December of 2021. That didn’t happen.

Many who were calling for $100K BTC are now saying it’s over. As most now are aware, the fed has been the largest factor driving asset prices over the last decade. So when there are talks of rate hikes potentially coming in March, market participants are now expecting a signficant decline in asset prices broadly as the fuel that was sustaining these asset bubbles may be going away.

Much of the fiscal stimulus that propelled markets higher like generous unemployment benefits, loan forbearance, and stimmy checks are not coming back anytime soon, so the marginal retail buyer in the US atleast may become a marginal seller. I think eventually these dynamics will result in a significant depression in the U.S. as CPI rises while consumers’ assets fall, but not yet. The market currently is overlooking significant short-term factors that likely leads to one more rally.

Let’s first look at the DXY. Notice that the Stoch RSI has started to roll over on the weekly timeframe. I back tested price data against this indicator as shown below:

There is only one data point in this 10 year time horizon where the dollar rallied w/in 4 months of the Weekly Stoch RSI rolling over. The majority of the time the Stoch RSI rolls over, we see a short-term correction or sideways price action for many months. Given this indicator’s historical correlation, the largest institutional dollar bull positions in recent years, and current narrative around fed tightening, I would bet against the crowd and say the dollar goes lower here.

If we’re correct about the dollar heading lower in the short-run, this should be bullish for risk assets as fed taper only reduced purchases by 25% so it’s still signficantly increasing its balance sheet ($90B/month) and a dollar decline would more than offset the decrease in purchases.

Let’s take a look at two other interesting charts that suggest market narrative is way ahead of the curve. First: US Monetary Policy Monthly Chart

Notice that we are currently sitting near historically very accomodative policy, and this has never coincided with large market cycle tops. It is only when the Real Fed Policy Rate exceeds that Natural Rate of Interest that we see cycle tops. While I still do believe that the fed will eventually tighten enough to deflate these bubbles, this chart suggests that’s not happening soon.

The next chart shows Valuations vs. Earnings against price of the S&P500.

Notice that bottoms tend to correspond with peaks in EPS growth and when P/E YoY becomes negative. This means that earnings are exceeding the price, which is bullish. It’ll be interesting to see how this affects the narrative, but my expectation is that next earnings will probably exceed expectations across various sectors in combination w/ the market realizing that fed policy is still accomodative. Because there has been so much uncertainty, there are many who reduced risk and are sitting on the sidelines. If a bullish narrative reappears for these reasons listed above, all of those sidelined $$ would end up back in the market creating a significant melt-up bubble.

Now, let’s focus a little more on crypto specifically. Everyone knows that I’ve been bullish on LTC and have outlined my reasoning in previous articles, so I won’t repeat myself, but let’s look at supply dynamics. Right now, we’re assuming that the narrative will change which will drive money back into crypto markets. If that assumption is correct how significant of a price move will we see?

Below is the chart of Illiquid supply, which measures how much available supply is on the market.

Currently, we’re at all time highs in terms of % of supply held by strong holders who are unlikely to sell. Given the assumptions listed about market dynamics changing, the price multiple for every $$ that enters crypto will be unlike anything we’ve witnessed before. In other words, price can move very fast in a very short amount of time.

This will trigger signficant increases in on-chain activity on the BTC network and fees will rise as user compete to get their coins to exchanges to sell as the melt-up happens. Because price should rise significantly faster in a shorter amount of time, and all those hodlers who’d been waiting for 100K in December finally will get their dream, they’re all going to be competing for blockspace moving coins out of cold storage to exchanges.

Signficant congestion will make BTC unusable. Historically, the corrleation between network congestion on BTC, and migration to LTC is signficant. LTC is like a call option on BTC, which means that if BTC is growing exponentially, LTC should be growing at an exponential rate in terms of BTC, so an exponential on top of an exponential. People will say that LTC can never make a similar move to doge because LTC doesn’t have an elon or much social media presence. While the latter is true, most don’t understand the supply/demand dynamics for BTC blockspace and how powerful this fundamental driver will be.

Below is a price/Stoch RSI comparison I posted a couple of weeks ago:

Sentiment is bearish, fear is near ATH’s, and as price continues to drag we’re seeing many long time bulls capitulate. This is what one would expect before a significant move to the upside.

IMO, max pain for the market is melt-up rally after change in narrative, then surprise fed rate hike to attempt to contain the melt-up later this year, which would result in an over correction and deleveraging event similar to the Great Depression in 1929.